What’s the Matter With Austria?

MUNICH – Last month, Austria avoided the election of a president from the xenophobic Freedom Party by the skin of its teeth. Indeed, the Freedom Party is now challenging the result. Given the worrying nature of the populist challenge, and its implications for European politics and the handling of the refugee crisis, it is important to diagnose what ails Austria, so that the cure doesn’t end up being worse than the disease.

Austria was once lauded as Germany’s more successful neighbor, one of Europe’s fastest-growing countries. But its economy has been sputtering since 2012, with GDP up last year by a meager 0.7%; only Greece and Finland performed more poorly. And Austria’s unemployment rate has soared, from 5% in 2010 to 10% today.

These developments have their origins in how Austria engaged with Central and Eastern Europe after the fall of communism. At first, Austria benefited from the European Union’s eastern enlargement. International trade soared, Austrian firms invested heavily in the region, and Austrian banks opened subsidiaries there, financing these countries’ modernization. All of this was good for business, and the Austrian economy grew rapidly.

But a hidden dynamic ultimately turned the tables on this success. Central and Eastern European countries had low per capita income, but were rich in skills. Austria, far wealthier, was not. In 1998, 16% of Central and Eastern Europeans (including Russia and Ukraine) had academic degrees, compared to just 7% of Austrians. So, when Austrian firms invested in Eastern Europe, they did not just relocate low-skilled manufacturing jobs; they also offshored the parts of the value chain that required specialized skills and produced valuable research.